Solo 401k thoughts/ questions on strategy.

[Damian Baynes]

Greetings everyone!

I’ll keep this one brief. Here is my situation. I started a small business which will not be my primary source of income anytime soon, however, I do have some funds from an old 401k that I would like to roll into a solo 401k. From what I understand, the only way I can take out a loan to buy property is via a non-recourse loan, which generally has much higher interest rates and fees. I’m looking to buy and hold. Do you think it’s better to buy a single family with all cash outright or to buy a multi-unit taking out a non-recourse loan?

Any feedback is much appreciated. 

Thanks,

Damian

[Brian Eastman]

@Damian Baynes

There is no simple answer, and like most things in investing, it comes down to risk-reward.

When your 401(k) uses mortgage financing to acquire property, then the 401(k) is obligated to pay the mortgage each and every month whether rents are coming in or not.  This requires planning and keeping some liquid reserves within the plan.

However, the use of leverage is a time-tested principal for boosting return on investment for each dollar deployed.

If you pay all cash for a $100K SFR, you can expect the ROI to be significantly less than using that same $100K as a down payment on a $200K duplex with similar performance characteristics. (Or 2 of those same $100K properties). The duplex will also have the advantage of less risk of $0 income periods due to vacancy.

Non-recourse financing in a 401(k) is more conservative than personal investor loans that include a personal guarantee from you (and therefore less risk for the bank).  Do not fall into the trap of comparing what your plan can do with what you can do.  The tax situation is so different, it is not apples-to-apples in any comparison - all cash or leveraged.  What you need to consider is whether a leveraged investment in the Solo 401(k) provides a better mix of risk/reward than a comparable non-leveraged investment.